One would think that when fixing broken oil rigs, it would make sense to use new parts.
As it turns out, oilfields have faced a pretty nasty economic downturn, and not all owners are willing to pony up for new shiny parts, so they decide to dismantle rigs that are no longer functioning as a last ditch repair effort.
Unfortunately, there are serious problems with this strategy…
You see, it can take up to six months before we see a rebound in drilling activity, and this whole rig-
cannibalization endeavor could ultimately slow the output of new rigs, even potentially delaying any production growth when oil prices eventually recover.
This slump has been so bad, it is estimated that most of the 1,100 non-working rigs have been scavenged.
Remember, the decline in drilling activity was caused by the steep drop in crude oil prices last year, from over $100 per barrel in August of 2014, to under $40 per barrel by the end of the year.
Nowadays, crude prices are struggling to find support above $50 per barrel.
Of course, we also have to keep in mind that any companies that sell spare parts for these rigs are getting hurt as well now that companies are scrapping rigs to keep up with rental rates (which are also falling).
Look, there’s absolutely no question that the oil industry is at (or only just moving away from) a bottom, so it’s easy for us to understand why these companies are looking to cut costs to stay afloat.
To continue reading…
Until next time,
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